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Factors to Consider When Thinking About Purchasing a Short Sale or Foreclosure REO properties (properties owned by a lender and acquired through a lawsuit, foreclosure or other method) are generally put on the market at 20% to 30% below comparable properties. It is estimated that the average cost of handling a foreclosure for the financial institution is $50,000 +/-. In most cases the listing broker is responsible for all services and repairs necessary to get a house ready to sell. Also they must arrange for lawn care, utilities, and maintenance and will be reimbursed by the lender on an agreed to basis. The best REO deals are generally old (four to six months old) as the price has been reduced significantly. Short Sales occur when a property is sold for less than the amount owed on the mortgage and the Lender agrees to accept that amount as satisfaction of the mortgage still owed. The owner of the home will have already proven to the lender that there is a valid hardship and that they are unable to repay the mortgage. There are three parties in a short sale, the buyer, the seller and the mortgage company. Once the buyer and seller have come to terms on the contract, it is submitted to the mortgage company for approval. It can take months for the mortgage company to respond. REO properties generally sell for more than comparable Short Sale properties because of the cost incurred by the financial institution in acquiring the property. The average REO listing is for 90 days. Generally Short Sales take longer because there are more parties involved in the transaction and more “red tape”. Time and patience are a must as sometimes it takes months for the Lender to make the decision to accept the discounted payoff or reject it. In Virginia the home owner of a foreclosed property has eight months to redeem the property. This means they have 240 days after the sale has occurred to regain ownership of the property, by paying as much money as the winning bid plus interest. Although it does not happen very often, it can leave the winning bidder with some uncertainty about spending money on the place or moving in because it can be taken away from them in the first eight months following the sale. REO purchases are less risky than buying at a foreclosure auction, but contain considerably more risk that Short Sale properties. When thinking about buying a foreclosure or a short sale, • Ask yourself, do you have the financial ability to complete the transaction? If paying cash, the lender may require that you provide evidence of your source of funds. • • • • • • • • Delayed closings are normal. The buyer may have to wait for some time to close and will have to maintain the mortgage commitment even through fluctuating rates. This sometimes means updating buyer information and can be stressful and annoying, but it is part of the process. Note: Purchasing REOs or short sales is not recommended for those homeowners who have a rigid timeline or have difficulty with changing policy or conditions surrounding the purchase. If buying for investment, the necessary timeframe may not pose a problem. However, if the buyer is looking for the home to be their primary home, any delay in closing could cause them to be without a home for an extended period of time, especially if they closed on their home before going to closing on newly acquired property. Buying Foreclosure or Short Sale Properties, in “As Is” condition: It may be wise to employ the services of a Home Inspector to determine the approximate cost of repairs or the cost of bringing the property up to code. Also consider checking into any potential issues such as mold, pest infestation, radon, potable water, septic/sewer etc. The Offer and Counter Offer Process: The Lender will require that the buyer sign an addendum that the Lender has prepared. Lenders generally will not allow revisions to the addendum and require that it be accepted as written except for a counter offer regarding price. The buyer must realize that in this addendum lenders sway the terms and conditions in their favor including the right to sell the property to another buyer if they feel it is in their best interest to do so, even though the buyer is under contract with them. Buyers need to know this is a potential problem upfront and must be emotionally ready for another buyer to come along and buy the property even if it is just prior to their closing. Escrow deposits. It is not unusual for the lender to require the deposit to be held by an attorney, Title search and due diligence. Start the process early on. Make sure that the Lender does indeed have legal possession of the home and that there are no outstanding liens. There have been cases where, even after closing, the buyer of a foreclosed home becomes liable to outstanding liens of the previous owner. It is prudent to hire a reputable real estate attorney to make sure the house conveys with a clear title. Think resale before you buy. Although none of us have a crystal ball, how easy do you think it would be to resell the home in a variety of markets. There are some great deals to be had With Short Sales and Foreclosures but it is imperative that you assemble a team of knowledgeable professionals, (Realtor, Attorney, Lender, Inspectors, Contractors, Handymen) to help with the process! Call me with any questions or concerns. For up to date legal information on foreclosures, go to www.foreclosurelaw.org